Accredited Investor Rules: What Founders Must Know
Navigating the legal landscape of fundraising is critical for startup founders. One of the most pivotal concepts in this space is the accredited investor designation. This classification, rooted in U.S. securities law, determines who can legally participate in many private offerings of securities. For founders, understanding who qualifies as an accredited investor—and the implications for raising capital—can protect your company from costly regulatory missteps.
This article provides a comprehensive overview of accredited investor rules, why they matter for startups, how to verify investor status, and the practical steps founders must take to comply with securities regulations.
What Is an Accredited Investor?
An accredited investor is an individual or entity deemed financially sophisticated and able to bear the risk of investing in unregistered securities. The Securities and Exchange Commission (SEC) defines this status under Rule 501 of Regulation D of the Securities Act of 1933.
Individual Accredited Investor Criteria (as of 2024):
To qualify, a person must meet at least one of the following:
Income Test: Earned $200,000 (individual) or $300,000 (jointly with spouse or spousal equivalent) in each of the last two years, with a reasonable expectation of maintaining that income.
Net Worth Test: Have a net worth exceeding $1 million, excluding the value of a primary residence.
Professional Certifications: Hold a Series 7, 65, or 82 license in good standing.
Knowledgeable Employees: Certain employees of private funds they are investing in may qualify.
Entity Accredited Investor Criteria:
Entities can also qualify if they meet criteria such as:
Assets over $5 million and not formed solely for the investment in the offering.
Registered investment advisers, banks, insurance companies, or family offices with over $5 million in assets.
Entities consisting entirely of accredited investors.
Why Accredited Investor Rules Matter for Startups
Startups typically raise capital through private placements that are exempt from SEC registration. These exemptions—particularly Rule 506(b) and Rule 506(c) of Regulation D—depend heavily on accredited investor participation.
Key Reasons These Rules Are Critical:
Regulatory compliance: Violations can trigger SEC enforcement actions, investor lawsuits, and rescission rights.
Fundraising efficiency: Selling to accredited investors simplifies the offering process and broadens the pool of eligible investors.
Investor protection: The rules presume accredited investors are better equipped to understand and bear the risks of early-stage investing.
Common Exemptions and the Role of Accredited Investors
Rule 506(b) – Private Placement Safe Harbor
Allows an unlimited number of accredited investors.
Permits up to 35 non-accredited investors, but they must be “sophisticated.”
No general solicitation or advertising allowed.
Founders are not required to verify accredited investor status beyond reasonable belief.
Rule 506(c) – General Solicitation Allowed
Allows general advertising and solicitation (e.g., via websites, social media, events).
All investors must be accredited, and the issuer must take reasonable steps to verify their status.
Examples include tax returns, W-2s, bank statements, or third-party verifications.
Verifying Accredited Investor Status
Under Rule 506(c), verification is mandatory, and subjective belief is not sufficient. Verification methods include:
Income verification: Review IRS forms (e.g., W-2, 1099, 1040).
Net worth verification: Review bank, brokerage, and loan statements.
Third-party letters: From attorneys, CPAs, registered broker-dealers, or investment advisors attesting to the investor’s status.
Founders can also use platforms like VerifyInvestor.com or Carta, which provide accredited investor verification services.
Best Practices for Founders
1. Know Your Offering Type
Determine early whether you will raise under Rule 506(b), Rule 506(c), or another exemption. This affects your outreach strategy, documentation requirements, and investor eligibility.
2. Use Clear Subscription Documents
Include representations and warranties from investors affirming their accredited status. For Rule 506(c), maintain documentation of the verification process.
3. Keep Accurate Records
Maintain a compliance file with investor questionnaires, verification documents, and offering memoranda. This can protect you in the event of an audit or legal challenge.
4. Work with Experienced Counsel
Securities law is nuanced, and compliance failures can be severe. An experienced startup attorney can help structure the offering, draft compliant documents, and manage verification procedures.
5. Avoid Public Statements in 506(b) Offerings
Be cautious with press releases, podcasts, or social media. Public promotion can unintentionally convert a 506(b) offering into a 506(c), triggering verification obligations retroactively.
Investor Compliance as a Strategic Advantage
Understanding and complying with accredited investor rules is not merely about avoiding liability—it is about building investor trust, preserving optionality in future funding rounds, and protecting your startup's valuation and momentum. In a regulatory environment that is becoming more vigilant and transparent, founders who take a proactive approach to securities compliance will find themselves better prepared for institutional capital, due diligence, and exit events.
If your startup is preparing for a capital raise and you're unsure how to navigate accredited investor rules, contact our office at 786.461.1617. Our securities attorneys are ready to guide you through the fundraising process with confidence and compliance.
